Margin on Cloud is About Leaves, Not Limbs

Margin on Cloud is About Leaves, Not Limbs

Just a few short years ago, Microsoft Office 365 launched. At the time, selling the product required genuine knowledge, and migrating to the product required genuine expertise. There was significant partner margin and incentives on the sale of Office 365, as well a nice margin on deploying it. Those days have long since passed.

Today, most customer companies are well aware of Office 365, and many are making plans to move to it. The seller’s job of explaining what it is, and why the cloud is a safe place to be, has become significantly less necessary. The technical expertise required to migrate a typical customer has been all but eliminated. Basically, anyone with a quarter of a brain can sell and deploy Office 365 today for a broad category of customers. What this means, as if you don’t already know, is that margins have been significantly compressed. If you didn’t see this coming, then you weren’t paying any attention at all.

Maybe the on-premises guys were right!

We were quick to move to Office 365 right when it launched. Coming from a cloud background as a former consultant may have given us a leg up, but frankly, before Office 365, we had no play to make in that space—because we did not possess the technical hardware skills to fix a broken mouse. As Office 365 took off and yanked us and other “early movers” up with it, the conversation shifted to: “Why are all you other partners still selling on-premises? Jump in, the water’s fine!” Many could not figure out how to switch revenue models, which is another conversation entirely. Now, with the compressed margins on cloud, some of those on-premises partners who stayed on the sidelines might be looking pretty smart, but their days are numbered as cloud continues to inhale their customers.

I’ll race you to the bottom!

Before Microsoft Cloud Solution Provider (CSP), most partners acquired Office 365 via the portal (WebDirect). This is also the same place that customers could buy it directly. In WebDirect, Microsoft set the retail price. Now, in Direct CSP, Microsoft sets the wholesale price to partners. In the case of Indirect CSP, Microsoft sets the wholesale price to your distributor, who then sets your price. In either case, you set your selling price to the customer. Good news? Well, this means that partners now have some margin to play with and can actually sell Office 365 to end customers at below the retail price. Let the race to the bottom commence. Offset that further by the additional costs you incur via CSP, like managing billing and support, and you can quickly see where the margin squeeze is inevitable. Office 365 is now a commodity (actually it has been for a while now). With the exception of complex projects, there is little money to be made and if your focus is on Office 365 alone, you won’t be around very long.

"In order to sustain good margins in the future, you will eventually have no choice but to focus on some verticals."

Did Microsoft pull the rug out?

I guess if you have not been paying attention, and just lifted your head up one day and wondered where all the money went, you might think that Microsoft pulled a fast one on you. But if you look past Microsoft to the entire market, and the competition, it is not hard to see that Microsoft is just reacting as they must. Your ability to make a nice profit as a Microsoft Partner is not their obligation or responsibility…it’s yours. It’s not like Microsoft has not been warning you that this was coming. How many times have you heard them tell you that you need to develop some intellectual property (IP), or focus on a vertical and gain specific expertise? That you did not act on these suggestions/warnings is not their fault.

Can Azure save the day for you?

For the moment, partners that have moved more of their focus to Azure are doing very well. But that path ultimately leads to the same place—though maybe not as quickly, as genuine technical skill is still a requirement. The same goes for Enterprise Mobility Suite (EMS), Cloud PBX, or any other utility. But watch as Microsoft, and third parties, work to eliminate that expertise requirement from the equation. Remember the skills that it used to take to set up an On-Premises Exchange server? Now that can be set up online by a complete moron who checks a few boxes. It won’t be long before Azure is a dashboard of a few checkboxes.

So can this IP idea solve the squeeze?

Maybe, for a while. The IP space is littered with hole-plugging solutions, but the hole they were plugging was eventually plugged by Microsoft. It’s not that they singled them out for elimination; odds are the hole was on the roadmap to be plugged eventually. For the most obvious holes, there will be multiple solutions created, and those are the most likely to be plugged. Most IP like that has a short shelf life. IP that has a true shelf life seeks to plug holes that Microsoft will never plug, holes that are obscure enough that multiple players will not seek to plug them, which brings us full-circle, back to verticals. While Microsoft has made a few direct attempts at vertical solutions (see Matter Center for Law Firms) they consistently give up on them. Microsoft simply does not have vertical expertise. It may appear that sometimes they are travelling up the tree to certain large branches, but they will never get to the leaves. Microsoft is simply too wide to get very narrow.

moneytree3That leaves us the leaves...

In order to sustain good margins in the future, you will eventually have no choice but to focus on some verticals. Focusing on ten verticals is not focusing, it’s marketing. Customers have always been willing to pay a premium for partners who actually understand their specific needs, yet almost all partners are generalists. There’s money being left on the table. It takes more than memorizing a few buzzwords to grab that money, however. From a technology standpoint, having an attitude that all businesses are basically the same is the generalist’s pitch; it’s easily overcome by someone with actual vertical expertise.

How long before CRM becomes a commodity?

There are few business applications that need to be more vertically specific than CRM in order to succeed. Ironically, where there are multiple CRM solutions for a particular vertical, there will be price pressure, but there are a lot of “leaves” still to pursue.


The original article appeared on the RapidStartCRM blog.

Share this Post: